Topline
Equities soared globally Thursday as investors absorbed the Federal Reserve’s jumbo interest rate cut, though stocks’ bond market counterpart appears not to be sold on the Fed cut.
Key Facts
Shortly after market open, the Dow Jones Industrial Average rose 1.3% to a new record of 42,105, the S&P 500 rose 1.6% to its new all-time high of 5,713 and the tech-heavy Nasdaq surged 2.3%, though it remains 4% below its July peak.
The rally comes after a choppy Wednesday trading session as Wall Street reacted to the Fed’s cut in real-time, as the Dow and S&P spiked to all-time highs shortly after the Fed’s afternoon decision, before all three major U.S. indexes closed in the red, even though the central bank opted for the more stock-friendly route of lowering rates by 50, not 25, basis points.
Stocks abroad jumped as well, as Hong Kong’s Hang Seng and Japan’s Nikkei 225 indexes rallied about 2% apiece and Europe’s Stoxx 600 and the U.K’s FTSE 100 indexes both gained about 1%.
A host of big-name stocks soared Thursday morning, with the likes of Apple, Goldman Sachs, Nvidia and Tesla all up more than 2%, while information technology was the S&P’s best-performing sector, rising about 2.5%.
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Contra
The bond market has struggled following the rate cut, as the yield for the benchmark 10-year U.S. Treasury note have gained some 10 basis points from its 3.65% level just after the Fed announcement to Thursday’s 3.75%, the highest yield in two weeks. Higher yields indicate lower bond values, and though lower interest rates typically help bonds, the move reflects fixed income traders’ concerns the Fed may have acted too aggressively with inflation still above the historic norm, resulting in higher interest rates over the long run. The 10-year yield is still about 15 basis points below where it was at the end of August.
Key Background
The Fed’s decision to lower the federal funds rate from 5.25% to 5.5% to 4.75% to 5% represented its first cut since March 2020. A cut looked all but guaranteed, but the central bank opted for the friendlier route of a 0.5 percentage-point move to address slowdown in the labor market and growing angst about an economic downturn. In a Thursday note to clients, Sevens Report founder Tom Essaye described the stock market’s jolt and drop as a“a sell the news” knee jerk reaction. Lower interest rates are almost always seen as a boon for stocks as lower debt financing boosts corporate profit margins, though if such a move from the Fed fails to stimulate the economy and predates an extended economic slump, as it did in 2007, it would likely bring pain for investors.
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